PRIMER: US and EU sanctions against Russia

Author: Olly Jackson | Published: 17 Dec 2018

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The new Russia Sanctions Bill,
set to be debated in the US Congress in the coming weeks, has
received criticism from the EU, suggesting that coordination
between the two jurisdictions over Russia is over.

There is fear that the bill will impact
companies financing the new Nord Stream 2 pipeline which
carries natural gas from Russia to Germany. EU president
Jean-Claude Juncker said that action will be taken if
assurances are not given about protecting European companies
from penalties. The extraterritorial effect of US sanctions
means that European courts would have little choice but to
accept the legislation.

Following the Russian invasion of Crimea
in 2014, EU and US leaders began to impose sanctions on Russian
and Ukrainian individuals closely connected to the Russian
leadership, freezing funds and enforcing travel restrictions on
these individuals. Further sanctions followed after Russia was
accused of conducting cyberattacks on the US and interfering
with the 2016 presidential campaign.

The environment between the US and Russia
means other sanctions, or at least extensions of existing
sanctions, are possible. This week, the EU extended sanctions
until mid-2019 which impose travel bans and asset freezes on
155 people and 38 companies over Russia’s
annexation of Crimea and support for pro-Moscow rebels in
eastern Ukraine.

There are not many alternatives for the EU
and the US if political tensions escalate. The so-called
nuclear option is to exclude Russia from financial markets,
forcing market participants to alternative payment systems and
severely hindering Russians' ability to conduct global
business.

"The sanctions are fairly
targeted, despite the general perception that you
cannot do any business in Russia"

What has been done so far?

The sanctions implemented are relatively
targeted and there have been several phases affecting certain
sectors of the Russian economy and specific transactions.
Developments have been unprecedented, including adding
oligarchs to the US specially designated nationals and blocked
persons (SDN) list which effectively gives them only two
options – keep control and cripple their businesses or
get rid of their ownership to keep the business afloat.

Oleg Deripaksa has chosen to do the
latter. The aluminium magnate and close ally of Russian
President Vladimir Putin has decided to sell off part of his
two-thirds stake in Russian energy company EN+ Group, after
being added to the SDN list. The company faces the prospect of
being barred from trading in US dollars and American companies
are no longer allowed to deal with the energy company.
Deripaska also controls aluminium company Rusal, also
sanctioned, and US investors are banned from any dealing with
the firm and other sanctioned entities. This has led Rusal to
warn that the sanctions could trigger a default on debts.

After the wave of sanctions in August,
Russian oligarchs were said to have lost almost $12 billion in
24 hours.

"The sanctions are fairly targeted,
despite the general perception that you cannot do any business
in Russia," said
Ashurst partner Sergei Ostrovsky. "They are limited to
specific persons, sectors and transactions and are not as broad
and all-encompassing so as to make it legally impossible to do
any business in that country."

The sanctions enforced in 2014 restricted
business with Russian oil and defence firms and companies
supplying goods and technology which could be intended for
military use in Russia. They also strengthened restrictions on
Russia’s access to EU capital markets.

The Office of Foreign Assets
Control (Ofac) sanctions in 2018 imposed sanctions on
seven so-called Russian business oligarchs and 12 companies
they own, plus 17 Russian government officials and a Russian
weapons company. These sanctions once again concerned travel
bans and asset freezes, forbidding US persons from providing
funds and forcing them to block their assets.

Yet despite the precise focus of the
sanctions, in reality, these are having a big impact across all
sectors in Russia.

"The general perception is that the
appetite for Russian transactions from EU and US-based
countries is limited, despite the fact that these could comply
legally," Ostrovsky said.

Are there differences
between the US and the EU’s
sanctions?

The US and the EU’s
approaches are reasonably well aligned, but there are some
crucial differences.

Section 228 of the Countering America's
Adversaries Through Sanctions Act (CAATSA) applies to US
persons but also foreign persons if they facilitate a
significant transaction with anyone sanctioned. This means that
these have an extra-territorial effect and therefore non-EU
courts will have to make a judgement on whether the accused is
doing a deal on behalf of a person sanctioned in the US.

If so, then any foreign person who
violates sanctions imposed upon a Russian listed on the SDN is
themselves at risk of being subject to US sanctions. This
significantly limits Russians ability to conduct business
globally. As yet there have been no test cases to see how this
would be enforced.

Yet, while there may be differences, the
high level of integration between the UK and the US means that
from a practical risk perspective it does not make much of a
difference, especially given the extra-territorial reach of the
recent American sanctions legislation. "In general, people are
being very cautious", said Ostrovsky.

According to
Ropes & Gray US partner Ama Adams, the US sanctions are
slightly broader than their EU counterparts. Last month the US
was reported to be pushing Europe to adopt more stringent
sanctions, but fears that the new proposed US sanctions could
impact the new €9.5 billion ($11.1 billion) Nord Stream 2
gas pipeline are making the EU resist strongly.

France said the Bill is unlawful due to
its extraterritorial effect, which effectively means European
courts would to accept the measures.

The US enacted sanctions in 2014 under two
executive orders passed by the Obama administration. Concerns
about President Trump’s relationship with the
Russian regime following the 2016 presidential campaign and
fears that he may be too lenient in his reproach of Russia,
have led Congress to pass legislation to convert executive
orders into law, so only they can change the law.

The EU sanctions are applied on a
pan-European basis, but penalties are up to each member state.
The UK under The Ukraine (European Union Financial Sanctions)
(No.2) Regulations 2014 could sentence any offender to two
years in prison and anyone conducting business with designated
persons must supply any relevant documentation to the HM
Treasury and co-operate with verifying any information.

What other options do the
EU and the US have?

US extending Russian sanctions could cause
the EU to use laws to block these measures against European
companies and individuals or impose outright bans on doing
business with US companies. Trump’s time in office
suggests that they are unlikely to back down.

If Russian tensions escalate, then EU and
US leaders could extend existing regimes, adding more
individuals and companies onto banned lists. But if this is
considered ineffective then more could be done to restrict
Russia’s access to capital markets and, possibly
as a last resort, cutting Russia from international payments
systems.

In the event of this, Russia would have to
develop its own payments system, but this would create a
liability for a Russian person or company complying with
international sanctions and wanting access to Western markets.

"The sanctions in 2014 intended to make it
difficult for Russian companies to get access to capital
markets," Adams said. "The overall goal was to provide a
powerful message after the annexation of Crimea so Ukraine and
Russia could get to a common decision, but you could argue this
has not happened."

Last month NATO general secretary Jens
Stoltenberg said economic sanctions are preventing Russia from
invading other countries, but since the Crimea invasion, Russia
has been strongly accused of interfering in two separate
election campaigns.

The new US Bill may be the first point at
which the EU and US diverge on their approaches towards Russia,
and will give those in Russia cause for encouragement. What
happens next may define the approach for years to come.